classical economics
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Treasury Trumps Fed
By Wayne Jett
© March 30, 2009

    On March 18, as Treasury secretary Timothy Geithner pretended efforts to restore a functional market for mortgage-backed securities, the Federal Open Market Committee announced the Fed would buy an additional $750 billion of MBS, meaning a total of $1.25 trillion in MBS bought this year. Less than a week later, on March 23, Geithner announced his own plan for public-private investment in MBS and, simultaneously, a joint statement of Treasury and the Federal Reserve tacitly reversed the FOMC action.
    Without referring expressly to the March 18 decision to buy $750 billion additional MBS, the joint statement declares off-limits any action by the Federal Reserve “to allocate credit to narrowly-defined sectors or classes of borrowers” because that is the province of “fiscal authorities,” meaning Treasury. The joint statement adds that actions taken by the Fed such as securities purchases “must not constrain the exercise of monetary policy” to foster employment and price stability.
    Although Geithner’s plan for FDIC-guaranteed financing for private equity and hedge fund buyers of MBS got all the attention on March 23 – and unwarranted credit for the 497 point gain in the DJIA that day – Treasury’s smack-down of FOMC’s intention to buy MBS in competition with private buyers was the real news of the day. Geithner’s favored buyers want no competition from the Fed (or anyone else) in scooping up MBS at fire-sale prices before FASB Rule 157 forces additional fictional losses by banks owning MBS.
    Treasury’s preemption of FOMC action runs directly contrary to practices under Greenspan’s Fed, which had its way with Treasury secretaries from Bush 41 to Bush 43. Outcome of the conflict is not yet clear. The FOMC action to buy so large a position in MBS was almost surely motivated by member banks nationally, while Geithner’s action advances interests of big money pools of Wall Street and Stamford. The contest is between broadly held American capital and the smaller circle of financial interests which have profited greatly in sharply declining markets of 2007-2009.
    Four more points relating to mercantilist management of status quo lawless manipulation in U. S. financial markets deserve mention. (1) Geithner’s private-public plan will not work and is not intended to restore prices of MBS. (2) FASB has proposed further interpretation of Rule 157 which may be adopted this week, but that, too, is a stalling tactic intended to confuse or appease Congress without resolving the accounting problem bedeviling banks. (3) The G20 nations are pushing hard for reforms to reduce financial fraud in U. S. markets, but Wall Street, Geithner and Obama will give little or no ground. (4) The dollar is in serious trouble as China, Russia, the European Union, Brazil and others signal (respectfully, so far) they are fed up with the malfeasance in U. S. economic policy.
    As U. S. policies come under criticism from abroad, politicians seek shelter in false nationalism. It is shameful, indeed, when neither U. S. political party steps up to protect the Middle Class from financial predators, and we must look abroad to find leadership with a sense of justice. ~